Fitch Identifies US Junk Bond Issuers With Upgrade Potential
Fitch Ratings identifies US junk bond issuers with the highest potential for upgrade to investment grade in a new report. The 18 companies analyzed in the report have Issuer Default Ratings (IDRs) of ‘BB’ or ‘BB+’ and have a Positive Outlook or are on Rating Watch Positive.
The list is heavily weighted to natural resources companies and includes Avista (NYSE: AVA), Cleveland Electric Illuminating, Entergy New Orleans, Flowserve (NYSE: FLS) Interpublic (NYSE: IPG), Potlatch (NYSE: PCH), and units of Ameren (NYSE: AEE), Sierra Pacific Resources, (NYSE: SRP), Terra Industries (NYSE: TRA) and Westar Energy (NYSE: WR).
Given ongoing uncertainties and tightness in the global credit markets, the incentives for companies to attain investment grade ratings are significant, Fitch says. In addition to a lower cost of capital, investment grade companies also enjoy fewer covenant constraints in bond indentures and loan agreements and typically require less security in the form of collateral than their speculative grade counterparts. For bond and loan investors, the movement to investment grade from speculative grade represents an opportunity to benefit from the decline in yield spreads and concurrent increase in price levels that generally accompany such a move.
Although Fitch does not necessarily believe that any or all of the companies included in this report will be upgraded to investment grade, investors should be aware of the possibility and are encouraged to perform their own independent analysis.
Analysis of the individual companies is available in Borderline Credits: Part II, a follow-up to a special report published in May on credits that were most at risk for a downgrade from investment grade to speculative grade.
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